I'm a big fan of www.insurancethoughtleadership.com. Sure the URL is a little long to type in but this site has some of the most innovative thinkers and the most interesting minds in our insurance community. Where else can you find peers and competitors challenging the status-quo with new ideas?
Today, I saw a post about the disruption of traditional insurance. The post was timely as I have recently been talking with a number of different people about how much the industry has changed in my 15+ year career and where it might be going. Particularly when taking into consideration the ongoing consolidation of the industry, one might ask where will this all take us.
The article here talks about the entry of Esurance as a new way to think about personal lines. Over the long term, I think we have to ask ourselves what will be the Esurance/E-Trade/Uber of the commercial lines marketplace. There is such a tremendous need to streamline the underwriting process and improve the efficiency by which we have clients apply for coverage. I fail to understand why in 2016 we still have clients print out and hand write applications. Why don't we just have them carved into stone?!? At least 'Policy Typist' is an uncommon job description thesedays.
There is a real opportunity out there for a technology that can overlay the existing insurance infrastructure and make us more efficient and more effective. I dream of a product/service/company that becomes the crowdfunded Uber of insurance. Let that one sink in for a bit.... (crowdfunded capital backing policies delivered by an Uber like technology platform engaging independent agents on a gig-economy basis - what could possibly go wrong) - (seriously, I just wanted to use as many buzz words as possible in a single concept).
If 'regulated industries are particularly vulnerable' as discussed by Guy Weismantel in his article, then the regulatory environment of insurance seems ripe for the picking.
First, I want to observe that for some prospective clients, apparently the word 'crowdfunding' is like calling someone a racial slur or something. I am learning to be very cautious because many companies don't want to associate themselves with activity that may be considered questionable at best and fraudulent at the worst. I am going to stick with alternative finance for a while because no one seems offended by that.
I have spoken to two different underwriters this week that are looking at a Reg A+ company. It is good to know that these companies raising capital are considering the importance of D&O insurance. In both cases, the underwriters declined the risk after considering the underlying business fundamentals. At the end of the day, the overall strength of the business is the relevant underwriting factor and not the type of capital raise. Although one underwriter did express his concern that the company was crowdfunding their working capital. I think the underwriter was hoping to see a little more boot strapping before bringing in outside investors.
The other observation I will make is that the platforms that purchased comprehensive D&O and Professional Liability coverage in the past year are experiencing a modest increase from the available markets. I think that the appetite for platforms has not caught up with the quantity and thus there is not much downward pricing pressure. We continue to pursue multiple markets and encourage carriers to join the party. There are so many platforms that need coverage, we believe that carriers can obtain some critical mass and spread the risk out over multiple clients. We hope to have two additional markets actively quoting deals in the next quarter. Stay tuned. We are working on a platform now that is bare. Waiting to see what the market supports.
A few interesting articles on 'crowdfunding' trends: Is Crowdfunding a "fad"? Click Here
Real Estate Crowdfunding Updates - Click Here
Another Real Estate Update - Click Here
Does your private company D&O insurance address capital raising under the JOBS Act or under a crowdfunding platform like CrowdFunder or Kickstarter, or EquityNet or any of the others? You might be surprised to learn that many carriers have added exclusions to their policies to specifically exclude capital transactions under the JOBS Act even though these transactions are exempt from the kind of SEC scrutiny that a public company might receive.
Hartford is one carrier that has offered language that specifically INCLUDES coverage for JOBS Act and crowdfunding offerings. If you are a private company seeking a capital raise outside of the traditional private placement avenue, you should be mindful of the extensions or limitations in your D&O policy. Consult a competent broker to make sure you have the coverage you need before you list your offering. Hartford is not the only carrier offering coverage. And remember that you may need to specifically request the endorsement because they won't be offering this on every policy.
For quick highlights on the Hartford endorsement, see the following link:
The litigation that is. While I am sure there have been others, on October 13, 2015 the SEC filed an injunction against Ascenergy for misusing assets raised via multiple crowdfunding platforms (notably EquityNet, CrowdFunder, Funable and AngelList).
Here is a copy of the SEC filing.
The complaint alleges that the offering was deceptive and that the funds were not used for the purpose indicated. This raises a significant question regarding the responsibility of the platform to verify the quality of the offering. The SEC alleges that many of the representations made in the offering documents are misleading and misrepresent the risk associated with an investment into the organization. To be sure, companies without the benefit of a crowdfunding platform have misled investors and had actions brought by the SEC. The interesting part of this case is that the crowdfunding platforms have allowed a larger number of participants to be impacted and likely significantly increased the size of the fraud. Article on the case here. Link to Forbes article here from May 2015 talking to the CEO of Ascenergy about his successful capital raise. Kind of reminds me when Andy Fastow got CFO of the year by CFO Magazine in 1999.
Should a platform conduct due diligence on the offerings it is promoting? Most in the crowdfunding community believe that due diligence, both on the part of the platform and on the part of the investor are critical elements to maintain the legitimacy and the credibility of the crowdfunding industry. Without some due diligence, how can an investor have any certainty that their potential investment is not a Ponzi scheme or worse. But what is the appropriate due diligence process. I suppose that's a topic that could use some work and discussion.
It is important for legitimate platforms to have a filtering process to determine if the entrepreneur or capital raiser is a legitimate business, has a reasonably credible business plan, and is the appropriate legal entity structure to accept an investment. The failure of this process may result in the discrediting of the industry as a whole (no wonder D&O underwriters are running from this stuff).
Platforms that are engaged in best practices need to consider the balance between policies & procedures, self funding of risk, and risk transfer to an insurance product. Even the best teams may allow a questionable company to raise capital and then the platform may face liability.
I will be watching closely to see if any of the platforms associated with Ascenergy get named in subsequent litigation for their role in allowing the company to perpetuate the fraud. More to come as developments evolve.
Today the long awaited rules for Title III implementation of the JOBS Act have passed. This section of the JOBS Act will allow investors that do not meet the requirements to be an 'accredited investor' to participate in private company offerings. Forbes states "This sets the stage for equity crowdfunding to continue its exponential growth over the next 3-5 years, on top of the existing market for accredited investors."
We're in the comment period now, but that will pass soon enough (only 90 days). I certainly expect to see additional platforms spring up almost overnight and existing platforms may be able to monetize their traffic in new ways. What does this really mean for the liability associated with a platform? We have already seen the SEC inquiring of platforms to make sure they don't run counter to the securities laws that exist and the implementation of Title III will not change this regulatory inquiry process.. It is expected that we will continue to see no action letters being issued to companies and platforms with the occasional demand to change or stop operations. A good legal team and careful execution within the law is important. The offering platforms that will house these opportunities may still need broker dealer licencing or approval from one of the state or federal agencies to operate openly and cleanly within the scope of the law.
Of interest is the issue that a true secondary market for private stock does not yet exist. When this liquidity issue is finally resolved then the distinction between those companies that are private and those that are publicly traded will truly be blurred beyond recognition.
The rules will continue to evolve and we will see case law develop when companies fail and litigation results. Until then, the exposures are unknown. Insurance products exist for the platforms/portals and broker dealers that will be holding out offerings and those companies raising money should consider how they can best protect their financial future through the use of appropriate insurance products.
The Forbes article is really informative and concise. Highly recommended.
The obvious follow on post to When is D&O Enough?, is of course, when is Professional Liability enough. Now the decision points start to get murky for FinTech and other AltFi companies. Professional Liability in it's simplest form is insurance for the performance of a service to a third party for a fee. All three components need to be there: (1) service; (2) third party; (3) fee. Professional Liability can be written for a very wide range of service companies from Lawyers and Accountants to Technology Consultants and Marketing Specialists. In fact, the beauty of the Miscellaneous Professional Liability product is that we can craft the definition of Professional Service to match the exposure of the organization.
When a company is operating an investment portal or crowdfunding platform, we have to stop and think about what the Professional Service actually is and what is the fee basis or revenue source of the company. It is from these questions that we determine the appropriate path to develop the right Professional Liability product.
Does your company provide a service for a fee? Perhaps you need Professional Liability coverage also. Contact us today to talk about your exposures and how to craft a product that addresses your needs.
As I sit and ponder both the evolution of crowdfunding and the changes to the insurance industry, I can't help but wonder when the two will converge. I spend my 8-5, Monday thru Friday, toiling away in an industry that has changed greatly since I joined. In 2001 when I joined AIG, we were still faxing quotes. Oh, from time to time we would send an e-mail quote but I used the fax machine regularly. It was rare that we would get a paper submission in the mail but it happened from time to time. Our underwriting process was limited for the most part to the information provided by the broker and the SEC filings if the company happened to be publicly traded. Today, it seems as if there is so much more information in so many places that I could almost underwrite an account without any submission information at all. Our processes have become much more automated and the ready availability of information in various databases and on corporate websites has quickened the underwriting process to say the least. I am pleased to say that I have not had my clients paper files in a filing cabinet since 2010 (thankfully my employers have been paperless since then). Going back a bit further, my favorite team member started her career as a policy typist and that was not quite 20 years ago. We've come a long way.
As I look back at the advances that have eliminated the gigantic folders of endless paper from my desk and those that have allowed me to upload 100MB of data on a client to a secure location so an underwriter can download in minutes, I wonder what is next. Certainly someone out there somewhere is working on the issues that confound me and plague this sometime inefficient delivery method we have of serving customers. Problems I would like to solve include: (1) improved application process. We are still sending out non-editable documents that clients seriously must print and complete by hand or type in with a PDF editor. Why can't we have interactive documents that expand fields to allow for complete answers and electronic signatures. (and Chubb, kill the massive disclaimer on page one of your document. Clients never click on it so it only hides the name and address of the firm. Seriously, just kill it). (2) issue the policy already. I fail to understand how I can build a basic webpage with graphics in 30 minutes but it takes you 60 days to issue a policy to me when the only thing you need to add is the name of the company. Travelers figured this out three or so years ago where they now issue the policy rather than the binder if everything is correct at the time of the order. Issuing the policy immediately saves so much time and energy that it should be an absolute requirement for all carriers.
Beyond the basics though, I would like to see innovation and creativity that will allow us to spend more time working with our clients to understand and reduce their risk and less time making endless calls to underwriters (Did you get my submission?; Will you release a quote?: Seriously, will you release a quote?; I got your quote; it's terrible. Can you do better?; Here's your order; may I have the policy, please?; Seriously, please issue the policy.; It's been 90 days, can you issue the policy? What do you mean you need one more signature?!?)
If someone would like to create a Premium Finance company that is backed by a crowd of investors, I am all for that. Sign me up. On the larger scale of going really old school, let's create a Lloyds syndicate backed by crowdfunded investors. Sign me up for that too! There are ways that crowdfunding in some form or another (call it FinTech, call it AltFi or whatever you like) will be impacting the insurance industry in the years to come. For a few perspectives, click on this link.
Apparently crowdfunding website Patreon had a tough week. Multiple news outlets report a successful hacking attempt and a data dump. Links to BBC, NYC Today,Market Business. The Patreon platform falls into the social welfare/rewards platform category in that they provide a platform for artists and other creative types to get funding to pursue their passions. Contributors sign up to donate money to the artist and may have access to content as a result of their donations.
Initial reports of the hack suggest that "about 15 gigabytes of data including names, addresses and donations have been published online". Reports go on to say that no credit card information has been breached. While this may be somewhat comforting, users and platforms should not take particular relief from this information. As we all know, credit card information is not the only useful or relevant data that can cause us grief.
According to the BBC article, the site was generating 16M viewers per month. That's a lot of potential data.
Of particular interest, the hackers involved in this breach have chosen to dump data on the internet for unknown purposes. At this point, personal data does not appear to be the target.
A case like this one brings us to the obvious question, do crowdfunding platforms need Cyber Insurance? Emphatically I will argue that yes, they do. In fact, in working with our clients and prospective clients, we find that Cyber is frequently one of the first insurance purchases made and often one of the cheapest. In fact, we have placed Cyber coverage for companies operating in the crowdfunding/fin-tech space for less than $2,000 (we have one client that paid $750). Of course, premiums go up depending on the exposures. Many may wonder how a policy might respond to a breach like this. Remember that Cyber products are not created equally and coverage may vary widely by carrier. Many of the products we use may have responded to the public relations side of this breach by providing assistance with the media and other messaging to customers and the public. Second, many of the policies we use may have responded by covering expenses for forensic analysts and other technology experts to determine what data was compromised and how the breach itself occurred. Then, these products may have responded by reimbursing the company for data restoration and recovery costs. There may have been coverage for reputational damage or lost business income also. Often, the breach that is discovered is only the tip of the iceberg with respect to what actually transpired and the full extent of the breach may take months to determine. I hedge a bit with "may have" provided coverage because prompt reporting and active engagement of the insurance company are key factors in the ultimate coverage decision by the carrier. Report early and often.
Imagine if Patreon had no insurance coverage? Those extra expenses to respond to the breach would have come directly out of their bottom line and limited their ability to grow their company. How would you pay for that? Does your platform have coverage? Cyber insurance is easier to get and cheaper than you think. Contact us today to find out just how quick and easy it can be to cover your platform from similar exposure.
In other news, T-Mobile and Scotttrade also had hacks become public this week. It just never ends.
I wanted to call this post, "Is D&O enough?" but decided that was too easy of a question. No, D&O is not enough. It almost does not even matter what the question was; it's not enough.
FinTech companies have a multitude of issues facing the leadership team: in the simplest terms, these are (1) what to do; (2) how to do it; (3) where is the money going to come from? Innovators in any industry spend a great deal of their time innovating and looking for a better, more efficient way to deliver their product or service. The focus of the leadership team is on the business and making the business successful. Few company CEOs or CFOs of development stage companies spend any time wondering about risk and insurance. Most don't even think about insurance until they are forced to do so.
Typically the first inquiry into insurance is either Workers Compensation or General Liability. In many states, Workers Compensation is "statutory". This means. that the company is required by law to purchase. Failure to purchase may result in a fine, penalty or other consequence. The General Liability conversation usually starts when the Client is leasing their first office space and the landlord asks for a Certificate of Insurance. Then the Client calls in a rush wanting to know how quickly we can place a basic GL policy for them.
Often, Directors & Officers Liability does not come into the equation until much later. When companies begin to implement a large board of directors or start raising capital outside of the 'friends & family', they start to think a little more about the potential for personal liability if something goes wrong.
Directors and Officers Liability coverage was created to address the exposure of stakeholders who may find fault with the decisions made in managing the company. I like to call this Corporate Malpractice insurance because I think it gives a good idea of the kinds of exposures that are covered. Directors and Officers Liability coverage addresses three areas that you care about. We frequently call these Coverages A, B, and C. While carriers may differ on their actual insuring agreements, A, B, and C are often referenced by D&O specialists and we will all know what you mean when you use these terms. More to come on how A, B and C work, how they work together, and how to structure your program to the greatest benefit of your company.
So now crowdfunding apparently can be used to fund a political campaign. But wait, funding a political campaign is one of the early uses of crowdfunding. Long before the JOBS Act, like-minded people came together with their dollars and supported a cause that was important.
Interesting article on NPR talking about a new entrant into the Presidential Race.
I frequently talk with underwriters and ask, "is this crowdfunding?" as I talk about the four quadrants of crowdfunding. Is crowdfunding a political campaign actually "crowdfunding" and is there any liability associated with this (really, not much).
Monica M. Minkel, RPLU, MLIS, cyRM, CPLP has been working exclusively with Directors & Officers Liability, Professional Liability, Cyber Liability and related products for nearly 20 years. She started her interest in finance by loaning money to her mom at age 11 (complete with a loan agreement and competitive interest rate). She is passionate about all things in the financial industry and the way technology is changing the way capital markets function.